This is part of an on-going series offering tips and tidbits on how to spend less, save more, invest better, and give wisely.
With interest rates on savings at historically low levels, it may seem tough to find a way to get a decent rate of return on your money without taking on risk. Interest rates on ultra-safe Federal Deposit Insurance Commission–insured one-year certificates of deposit (CDs) are only yielding around 1 percent. Tie that same CD money up for five years, and you might get a whopping 2 percent!
Money market funds and bank savings accounts essentially pay no interest. With some banks, you now have to pay them to keep your money!
This grim reality is made even worse by two more factors. First, the Federal Reserve has indicated that it plans to keep interest rates at these low levels until at least 2013. Second, inflation continues to rise. Through the end of July 2011, the Consumer Price Index (CPI) increased at an annual rate of 3.6 percent. So, if you are earning 1 percent on a CD, at the end of the year the real purchasing power of your money went down by 2.6 percent!
What can you do? One foolproof way to get a decent rate of return on your money is to spend it wisely. For example, we all have to buy groceries—and the less you spend to get want you need and want, the more you save.
Take frozen vegetables. A brand name that I use has varieties that normally sell for $1.79 for a 16-ounce bag. These are regularly on sale for $1. That 79-cent savings is like earning a risk-free interest rate of 44 percent!
Buy-one-get-one-free sales also happen fairly often, and when they do, that’s a guaranteed 50 percent savings rate. Take that, Ben Bernanke!
Sometimes the sale may seem too insignificant. For example, an item selling for $1.09 is on sale for $1. Yes, it’s a savings of only nine cents, but that still translates into a savings rate of more than 8 percent.
But wait—there’s even more good news. The amount you save by taking advantage of sales is tax-free! Earn $100 interest on your CD, and you’ll give a portion of that back to the taxman—but with these savings, you pocket it all.
Of course, if you combine sale prices with manufacturers’ coupons and other promotions, the savings can be truly spectacular. One caveat: It’s not a good investment if you don’t need the sale items or if you buy more than you can use or store safely. The goal is savings, not hoarding!
Do you have some savings tips to share?